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Why You Shouldn’t Waste Your Money on Gold Miners

Gold miners may look like a smart bargain play. But given the track record in gold the last four years, it’s not worth the wait.

A couple years ago, in a former life working for another company in the investment industry, one person I worked with recommended a stock called Sandstorm Gold (SAND).

Sandstorm is a Canadian company that invests in some of the best junior gold miners in the world, supplying them with up-front funding in exchange for a hefty portion of all the gold they mine at a fraction ($400 an ounce at the time) of the going price of gold. Even if gold prices somehow plummeted below $400 an ounce, Sandstorm would still get its share of the loot at a discount, creating the impression that the company was impervious to the wild fluctuations in gold prices that makes most gold miners so volatile.

It seemed like such a smart business model, and investing in a gold stock seemed like a good idea, given that most of them could be bought at a bargain after several years of declines. I was sold hook, line and sinker on the stock, as was half my company.


Since then, gold has continued to plummet, and Sandstorm has fallen right along with it. At the time, the price of gold was hovering around $1,300 an ounce; as of this writing, it’s down to $1,093 an ounce—a decline of roughly 16% in two years. SAND has declined 52% during that time. So much for the theory that Sandstorm was immune to gold’s whims.

The truth is, no gold stock has been safe for quite some time—not just the last two years, but dating back to August 2011, when gold prices peaked at $1,900 an ounce. As gold has lost 42% of its value in the nearly four years since its historical top, gold miners—as they tend to do—have fallen much further: the Market Vectors Gold Miners ETF (GDX), the fund that tracks the largest gold stocks on the market, is down 78% during that time.

Along the way, plenty of analysts—contrarians, value buyers, gold enthusiasts—have insisted that gold would bounce back and, with it, gold stocks. The U.S. dollar would eventually collapse, and when it did, you’d want to be sure you owned a slice of the yellow metal, long considered the ultimate safety play. Those people claimed it two years ago when gold fell to $1,300 an ounce, they claimed it last November when gold sank to $1,150 an ounce, and they’re still claiming it today.

Don’t listen to them.

Yes, gold has historically been a safe haven, a commodity to buy and hold for a rainy day as a hedge against a market crash and/or a collapsing dollar. That worked well in 2008-2011, when the global recession and its aftermath pushed the dollar to its lowest value in decades. But those types of cataclysmic events only come along once every 15 years or so.

I’m sure there will be another dollar collapse in the next decade … and then it will bounce back like it always does. Is it worth loading up on gold and hiding in a bunker somewhere for the next 10 years on the off chance of a double-dip recession? Think of all the opportunities you’ll be missing out on.

Virtually everything has outperformed gold and gold miners the last five years. Don’t take my word for it—see for yourself:

Total Return, Last Five Years

Only oil has been a worse laggard than gold during the last five years, and most of oil’s drop-off has come within the past nine months. Gold has been on steady decline for four years.

Eventually, gold prices will bounce back, but don’t expect a return to its post-recession highs anytime soon. The sky isn’t falling just yet, and don’t let Wall Street’s Chicken Littles convince you otherwise.

It’s okay to buy a few gold bars or gold coins at these depressed prices. Physical gold still holds some value as a long-term safety play.

Just don’t waste too much money—or thought—on an out-of-favor commodity in case of a rainy day. Not when there’s so much sun shining on other sectors of the market.

Chris Preston is Cabot Wealth Network’s Vice President of Content and Chief Analyst of Cabot Stock of the Week and Cabot Value Investor .